Bank Deposits: Are you aware of this interesting fact?

We opt for Bank deposits because they offer, 1) safety and 2) guaranteed returns. Bank deposits can be Fixed Deposits, Recurring Deposits, and Bank balances in Savings or Current accounts. The total bank deposits in India stood at US$ 1,274.3 billion in Financial Year 2013. That’s huge!

I believe that there is no such financial product where it is completely risk free. Bank Deposits are no different. What if a bank goes bankrupt? What happens to the investors’ deposits?

If a bank defaults or goes bankrupt then each depositor in a bank is insured up to a maximum of Rs.1,00,000 only (Rupees One Lakh) for both principal and interest amount held by him.

The bank deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and a maximum amount upto Rupees one lakh is paid (if a bank defaults) .This is provided by RBI’s Deposit Insurance & Credit Guarantee Corporation (DICGC).

For example, if an individual had an account with a principal amount of Rs.95,000 plus accrued interest of Rs.4,000, the total amount insured by the DICGC would be Rs.99,000. If, however, the principal amount in that account was Rs. On lakh, the accrued interest would not be insured, not because it was interest but because that was the amount over the insurance limit

If an individual opens more than one deposit in one or more branches of the same bank, then all these are considered as accounts held in the same capacity and in the same right. Therefore, the balances in all these accounts are aggregated and maximum insurance cover is available upto rupees one lakh.

Bank Deposits held in joint accounts:

If more than one deposit accounts (Savings, Current, Recurring or Fixed deposit) are jointly held by individuals in one or more branches of a Bank say three individuals Modi, Krishna & Sushma hold more than one joint deposit accounts in which their names appear in the same order then all these accounts are considered as held in the same capacity and in the same right.

Banks have the right to set off any receivable dues from customers against deposit insurance. Deposit insurance premium is borne entirely by the insured bank.

So, if you want to invest say Rs 3 Lakh, you can consider investing one lakh each in three different banks. If you have deposits with more than one bank, deposit insurance coverage limit is applied separately to the deposits in each bank.”

You may ask, do banks go bankrupt? Answer is we may all know what has happened in United States of America in 2008/2009 (Financial Crisis).

The Reserve Bank’s credit insurance arm has paid over Rs 142 crores to depositors of 19 cooperative banks that have gone bankrupt in 2008-09. During 2007-08, as many as 22 cooperative banks closed operations.

Sreekanth Reddy

Sreekanth is the Man behind ReLakhs.com. He is an Independent Certified Financial Planner (CFP), engaged in blogging, financial counseling & property consultancy for the last 6 years through his firm ReLakhs Financial Services . He is not associated with any Financial product / service provider.
The main aim of his blog is to "help investors take informed financial decisions."

Comments

Varunsays:

October 1, 2016 at 5:47 pm

Dear Sreekanth,
For your knowledge before nationalisation the liability of all theses current public sector banks were Limited as like our Pvt\co-op banks. Before nationalisation it was corporation bank LTD, Dena Bank Ltd, Vijaya bank LTD etc ; after passing the nationalisation act in the Parliament the liability of these banks & PSU insurance companies became unlimited. These financial companies cannot be liquidated as like other normal companies. How a Government financial company can tell that it’s liability towards it’s citizens is limited to certain amount. If you still confused go through Banking companies acquisition and transfer of undertaking Act 1979 passed in the Parliament. Which is available in internet. All the deposits, how big it is, is safe in the Public sector Banks. So in India it is treated as most safest deposits is with Public sector Banks, it is treated as risk free demand investment/deposits.

Hi sreekanth,
I want to live the rest of my life on my savings monthly interest , approx. 75lakhs.
wat wud be the best /safest option for monthly income.if its FD the shud I deposit it with 75 different banks…plz advise
thanks dear.
Rajesh.

I would like to go for long term deposit for my girl future, like say Rs. 60,000 per year paying for 7 years and after that no payment for 8 years, it will be like locked. At the end of 15th year I will be getting the amount + the guaranteed interest is 11.5%. Is that the correct decision I can apply for this scheme with HDFC or I can go ahead with some other options with government schemes?

Kindly suggest me your best I would like to invest for my daughter future.

Dear Sreekanth,
Till date i have been investing only in life insurance plan.
I have optioned all my insurance needs with lic’s Jeevan Anand and New Jeewan Anand till date.
Is it right to go with the same in future too.
Thank-you.

You may note be able to meet your long-term goals by investing in life insurance especially traditional plans like endowment or money-back. Buy a term plan and invest other investment options as per your financial goals.
Read : List of best investment options in India.

Dear Shailesh,
Total 6 policies? You have not mentioned the respective policy names??
The policies (assuming these are conventional ones) of 2008 & 2005, you can make them PAID UP.
The policies of 2013, you can surrender them.
2015 policies you can just let them lapse and book losses.

Kindly go through the links that I have shared in my previous comment.

Dear sir,
Hope you are doing great!my friend has multiple fixed deposits in Telangana Grameena bank. tgbhyd.in .
It is govt bank.central govt,state govt of telangana and state bank of hyderabad have partnerships in the bank,so how safe are his deposits.now now touch would if some things happen to this bank who will pay the fixed deposits.my friend has almost close to rs 10 lakh in fixed deposits.he is not working due to his illness,he is depend on this fd interest for his survival.he is 35 years of age,un married.so how safe are his deposits,any other safe investment plans where in he can get monthly interest.
2.In pension plans will opted for single premium will they give the lump sum amount if he surrounds the policy
3.For private banks like icici ,hdfc etc if they suffer losses will the govt pay the deposits for the customers
4.In national pension scheme,Tier 2,how to open it and can he withdraw amount when ever he want.
5.How to start monthly SIP’s starting from rs 500 per month.Are there any sip’s for one year duration.

Dear dilip,
1 – As discussed in the article, up to Rs 1 Lakh is guarenteed in case if bank goes bankrupt. Also, it is better to deposit Rs 10Lakh with multiple banks.
2 – Check with life insurance company if they can issue a Term plan (considering his illness and income potential). He has to get himself and his family
covered with personal accident and health insurance covers.
Read :Best term insurance plans.Best Personal accident plans.Best portals to compare health insurance plans.
3 – No. It is the same case with Public sector banks too. But our banking system is strong. The entire banking system may not collapse that easily.
4 – Better not to go ahead with NPS.
5 – SIPs can be done for any duration, but when does he need this money? Let me know more details abt his dependents, financial obligations etc.,

Dear Dileep,
This is for your information. Sreekanth Reddy’s logic of bankarupt is applicable only to Pvt banks & co-operative banks. Even so there is a distant chance of bankarupt of Private banks. All the Pvt banks are controlled by RBI (COOPERATIVE BANKS by NABARD). So before bankruptcy the pvt . Bank will merge with some strong pvt/ Govt bank to save the depositors.
The Rs.1 lakh RBI Insurance coverage is mainly applicable to the depositors of Pvt banks & co-operative banks, because they are under companies act & thr liability is limited. Ex. Icici bank LTD, Hdfc bank Ltd. etc . But this is not the case of Public sector , Regional rural banks (They are owned by Central Government). Hon. President of India is the Guarantor to the depositos (There is no amount restriction for his Gurantee).
If a company got liquidated then who will give bck your investments. What happened to Sahara group, Kingfisher shares & there corporate bonds. So think before several times before investing in shares& mutual funds. Even the investment God Warren Buffett (sorry for spelling mistakes) told that, in your total networths maximum 20% only should be invested in Secondary market (shares,mutual funds) the remaining should be invested in GOVT backed (secured investment). Even in America there is no GOVT banks (so only in Treasury bonds). But in India we people are lucky here we have Government owned banks.

Even Sreekanth shows the example of American banks, he is silent about what happened to our own country Investors who put their hardly earned money in shares, Ulip funds, mutual funds in that period 2005-2010. The investors put their money in Secondary market Only because some people were there to misguide them.

Dear Varun,
Thank you for sharing your viewpoint.
The information regarding Rs 1 Lakh insurance is applicable to all banks including the PSU banks.
I agree that Indian banking system is robust and a well regulated one.
This article is to highlight the fact that almost all investment products can be subject to some types of risks (low to high) and we must be aware of this and plan our investments accordingly.

Very useful information..I have one question..i have an savings account in one bank say HDFC and i have opened 3 FD accounts each one amounting to 1 Lakh…will my 3 accounts will be aggregated and considered as 1 account and deposit insurance coverage will be limited to 1 lakh or will it be 3 lakhs…

Good to see some facts based information. As no financial products are risk free. I assume it finally depends on individual risk appetite how much risk does he/she wants to take and how much return one wants. Almost 80-90% (basic assumption ) of Indian population depends or opt to bank product or traditional products as their investment.
My question is how to choose the financial products that fits for your need or likely to fulfill your requirement. Equity related products are often so complex, even if you understand, there is always somethings hidden in their terms and conditions. Now if we are considering for long term investment ( more then 10 years) and at the end you came to know that just because of so and so reason ( how chilly it might be) your investment will not return what you assumed, then you had no option except to look at some alternate source of finance. And after ten years of your life the conditions will not remain same.
I believe this is one of the main reason why people look for Banking products and just ignore the return after tax and inflation, even if they understand it clearly.
I want to save for the eduction of my child ( 3 months old ) and PERSONALLY feels that Sukanya Samridhi Scheme is good option, it gives you return more the PPF, tax exempted under EEE and 99% chance is there that you will achieve your financial goal (except only when the bank where you open the SSA goes bankrupt).

P.S. – My opinion is not meant to hart the views of any one. Just like to take this wonderful opportunity to introspect myself.

Dear Bikash,
I agree with you that many of us opt for safe and capital protection oriented financial products. The numbers are also saying the same (My article on this..”RBI’s data on financial savings of the households.”)
I disagree with you about the ‘complexity’ point on Equity related products. It is the greed and panic (behavioral aspects) that make things worst and complex, not the products. Also, the availability of products is also an important factor.

Mutual funds are very simple and easy to understand. The penetration levels are still low (availability factor).
Long term orientation is good but at the same time, periodic review/monitoring of the portfolio is very much essential. One should not stay invested in Equity related products till the goal target year is reached.

As opined by you, an investor has to get decent real rate of return (inflation adjusted) to accumulate decent wealth. There is no other option than to diversify his/her investments across the asset classes.

Sukanya scheme is a decent debt oriented product. As of now the Rate of interest is higher than PPF’s. A part of your savings can be invested in this product. But again, if you channelize all your savings into this scheme then it may be very tough to accumulate the required corpus for your Kid’s education goal (considering the education inflation rate in India). What is your opinion?

Thank you Sree, well you have rightly point out that the complexity is not because of the products, its because of the behavioral aspect that we very soon started panic when we see the downward movement of our investment. From last couple of days, I was trying to get first hand information on MF, thanks to your blog.

Well if I can get return of 15-18% ( with some monitoring) return on my hard earning money then there is no point to settled at 9.10%.

Few droughts in my mind-

I) What is Alpha? how does it help us in investment? From where we can find it? Does every fund has one? how does it calculated?

II) What are the charges applicable in MF? Do we need to pay Service charges? ( recently i read in news paper that if two MF funds are merged they will not be consider as fresh investment and no tax will be applicable, which also means earlier tax was charged to investors if his/her funds merged with some other funds.)

III) how the performance factor is related to the sized of the funds. Do you think that one should consider the size of the funds as a factor for choosing a fund.

IV) there are some tax saving MF, does only these funds gives tax benefits or others funds may give us tax benefits? is the tax exempted under EEE ?

Lastly but not least, Three big cheers to your blog, you are doing to gr8 job, keep it up. thank you.

Dear Bikash,
1 – Alpha is a measure of risk-return adjusted performance of a fund/security/investment relative to its benchmark. Higher the Alpha, the better a fund is. A positive alpha would indicate that the fund manager has done a good job in the past, outperforming a benchmark. You can find Alpha details in most of the MF research portals. Check this link. Under ‘Risk Measures’ you can find details standard deviation, alpha etc.,

2 – If you invest through online distribution platforms like icicidirect.com, they may charge you brokerage fee (per transaction or per SIP). Some online platforms like fundsindia.com do not charge the customers (they get commission from fund houses). Yes, mergers do not lead to taxation issues (for unitholders). But it is advisable to track the Fund(s)’ performances, coz fund managers may change after a merger.

3 – For long term investors, i do not believe this as a major factor.

4 – Investments under ELSS MF category fall under Exempt – Exempt – Exempt category. Investments in equity oriented funds (portfolios which have > 65% of investments in equity) give you capital gain benefits, if units are held for more than 1 year, but no tax deductions..

Thank you once again, as of now I need to plan for three financial goal-

1) One emergency fund of Rs 2-2.5 lac in two years
2) One fund of Rs 2-2.50 Lac for family weeding in two and half year
3) One fund of Rs 25 lac for the education of my child which will be required after 15 years.

In my present situation I can invest Rs- 10K-12K/months for these funds.
In the last few days search I had selected HDFC child gift invest ( equity ) funds for investment, what other funds you suggest for investment.

And if I directly invest from the AMC such as HDFCfund.com will that be less costly for me, I would prefer to invest online.

1 & 2 – These are very near term goals. So, you can’t afford to invest in high risk-profile fin products. Consider investing in short-term FDs /RDs, use sweep-in accounts etc to accumulate the required funds. Try to maintain an emergency fund which is around 3 times (min) of your living expenses (do not forget to include all the ‘needs’). Also, suggest you to accumulate this fund in the next 6months to 9 months. Do not take 2 years to accumulate this fund. So, allocate your entire disposable income (10k to 12k) towards this goal, as of now.
3 – Start investing in HDFC Gift fund (its a good choice) and Franklin India Bluechip fund, if you could increase your disposable income (by decreasing your expenses). Let the SIPs be for Rs 500 *2, but start investing…
If you invest directly, you get better returns (higher NAV), compared to indirect/regular plans.

Thanks for making people aware of this fact! I think even non-managerial bank employees may overlook this stark reality of absence of 100% guarantee on bank deposits, even in government-owned banks.

A related question. I often hear that bank FDs are not a good long-term investment due to their low post-tax returns which don’t keep pace with inflation. But for people who cannot invest in equity-related schemes (mutual funds etc.) due to various reasons, is there any better long-term investment option (leaving aside immovable property, gold etc.) than PPF plus bank FD?

P.S: Sorry if this gets posted second time. Retrying due to website error.

Dear Guest,
Thank you. Yes, no investment option is totally risk-free.
You have mentioned all available good investment options. If an investor wants ‘better’ investment options for long term, he/she has to consider equity related products. That is the only way to create long-term wealth, which can beat inflation & tax adjusted.
Another important point we need to consider is “low insurance coverage.” Many of us chase returns and forget to have good insurance coverage.

Yes, people must have proper insurance coverage as well – atleast a sufficient amount of life insurance for the sake of dependents and health insurance coverage. It is in life insurance that people often get misled by some over-enthusiastic agents who highlight the pros of certain endowment and money-back plans but not their cons.

Regarding long-term investments and ways to stay ahead of inflation, I read about some inflation-linked saving schemes or bonds introduced by RBI. Is this scheme still available? RBI’s website has a page about such a scheme but the page doesn’t indicate whether the scheme is still available.

Tax-free bonds issued by PSUs and government undertakings were another good option for people who want to avoid investing in equity-markets, but unlike 2013-2014, no such bonds have been introduced as yet this year. Would be good if such bonds are made available this year too.

Dear Guest,
The income from Inflation linked bonds is taxable as per the tax slab on maturity. What is your take on this? I believe they were open for subscription till Dec 2013.
Yes, tax-free bonds are good options for those who are in highest tax bracket and want to protect their capital.

Hi,
Thanks again for sharing your thoughts! Yes, post-tax returns on inflation linked bond scheme will not be high going by the description of that scheme but atleast it seemed to provide a slightly better cushioning effect against inflation in the long-term compared to bank FDs which do not have tenures beyond 10 years. I therefore thought that the scheme would be a good and safe savings instrument (though not suitable if high capital growth is the aim). Is that a right assumption? And if it was indeed a good savings instrument, then it is disappointing to know that the scheme is no longer available.

Dear Guest,
In one of your previous comments, you said that you hold few endowment life insurance policies. What made you to purchase those unwanted insurance plans? (I am assuming you have fair knowledge on the available right investment options, after going through all of your comments)

Hi,
It is only in the recent times that I have gained a better understanding of some common investment options and related financial terminology. My knowledge is still very limited and websites like yours help me a lot in understanding this field better. Thanks for disseminating knowledge on financial matters to common people!

Unfortunately, I took those endowment policies at a time when I did not even know the different types of life insurance! I used to rely entirely on the advice of elders at home when it came to financial matters. I did not opt for those policies voluntarily – I was being pestered by some insurance agents to take some policies, that too at a time when my family was going through a stressful (though not much financial stress) period and we hardly got time to understand what those policies really meant. One agent even made it appear as if taking several such endowment policies was an ideal retirement plan! Atleast I was careful enough to not commit myself to making large expenditures for a long period, so ended up taking a smaller number of policies.

It is only after a few years that I began to see the effects of taxation and inflation eat into one’s savings. And as the next premium payment date neared, I studied the features of the policy in detail, compared it against common savings options and other types of insurance and realized that these policies often do not measure up to even to low-yielding non-insurance savings schemes 🙁

Dear Guest,
Thank-you for sharing your views and personal experiences.
Insurance is a must-have but unfortunately lot of unwanted plans are sold aggressively in India (it should be bought). Most of the agents do not have any idea about the features of products. They are just too good at selling and convincing the investors. The scenario in rural/town areas is even pathetic.
I am from a rural background and I know that ‘how insurance is sold/bought in these areas.’

Hi,
I did not know that insurance is aggressively sold even in rural areas. Selling high-cost, insufficient-coverage policies to the poorer illiterate masses would cruel. Hope regulatory agencies step in soon to curb such marketing and require insurance agencies to provide more meaningful insurance schemes to the poor.

Dear Guest,
I believe that in case of Post office deposits there is no such Govt agency like DICGC (Deposit Insurance and Credit Guarantee Corporation) to safeguard the interests of the customers.
So, this feature makes them (bank deposits) safer than post office deposit schemes.

Guestsays:

February 28, 2016 at 2:00 pm

Post Office Deposits are not secured by RBI’s DICGC. The money are directly taken by Government and has Sovereign Security. Sovereign Security means security by President of India.

Guestsays:

January 21, 2015 at 12:23 am

Good that you tried to make the online community aware of this fact! Very few know or atleast give a thought to the start fact that even government-owned banks do no give 100% guarantee on safety of deposits.

I have a question in the context of FDs (banks or otherwise) – in http://business.rediff.com/report/2009/oct/23/perfin-the-pros-and-cons-of-investing-in-fixed-deposits.htm, it is mentioned that bank FDs are not a good long-term investment option due their low post-tax yields when compared to high inflation, which is obvious atleast to those who follow finance news. However, for people who cannot invest in equity-related schemes (like mutual funds) due to various reasons, is there any investment option that would be better than PPF plus bank FD? I am leaving out investments in gold, immovable property etc.

Thank you for your comments. The options for withdrawing the deposits depend on the type of the deposits. If it is normal Fixed deposit for 1 year, you can withdraw before maturity (may be some penalty will be applicable, depending on the bank’s terms & conditions). Banks may not go bankrupt overnight but the catch is, to be alert enough to sense those hints..What do you say?